About Piponomics

Economics plays a huge role in the foreign exchange market. I enjoy looking at economic trends and trying to see how it may affect currencies, and life in general. I will post my thoughts and observations here. I'm throwing macroeconomics, forex trading, pop culture, and everyday life into a pot and hopefully the final product are lessons about the FX market that's easy to understand.

GDP Release: Party in the USA?

Pretty tight week in trading, eh? Well, we may see traders bust a move come Friday, as the advanced US GDP report is coming in! Just in case y’all forgot the dance steps, this is the first of three versions that the US government prints. Because this is the first version, its effects may be magnified and may bring down the house!

Word on the streets is that the annualized growth for the 2nd quarter was at a mere 2.5%. This means it would fail to match first quarter GDP growth of 2.7% (which was downwardly revised from 3.2%), and not even hit half the 5.7% growth posted during the last quarter of 2009!

The recently released Beige Book also provides us with some clues on what the GDP report tomorrow will bring. According to the report, there was an improvement on economic activity, but the growth was unconvincing and was only of “modest” pace. Perfectly understandable, given that most of them improvements seen in the US economy were brought about by temporary factors! *cough* tax credit for first time home buyers and census hiring *cough*

It also doesn’t help that consumer confidence is on the decline. The CB consumer sentiment survey has fallen for the last three months, from 63.3 to 52.9 to 50.4. Falling confidence usually translates to weaker economic activity, because people tend to save more when they are insecure about their financial standing.

Retail sales, which constitute about two-thirds of the GDP was anemic during the second quarter. While there was a 0.4% rise in April, both May and June’s figures reported declines.

But even if the growth figure falls short of consensus, I doubt that it’ll be enough to cause widespread panic all over the markets. I can’t say we haven’t been warned, what with the Beige book already released earlier this week and several downbeat comments from Fed officials. I mean, who gets surprised when it drizzles after the weather forecast says it could rain?

Then again, I was referring to a slight miss earlier on. If the actual figure lands drastically below expectations, like printing a measly 0.5% growth for instance, investors probably won’t think twice about dancing to the beat of the risk aversion! They might start thinking that if the hotshot US economy can’t even sustain its economic progress, other smaller economies could be standing on shaky grounds as well. This can’t be too good for higher-yielding currencies as these concerns could force traders to flee to the safe-havens. And who stands to benefit? That’s right, the US dollar.

On the other hand, if by some miracle, the actual GDP comes in way stronger than expected, traders could get risk-hungry and start gobbling up those higher-yielders. “All that talk about a slowdown in the US economy… Bah! The US is unstoppable!” they’d probably think, “And if the US can pull it off, so can the rest of the world. Time to exchange my safe-haven currencies for higher yielding ones!”

Just to be clear… A weak GDP could be dollar-positive while a strong GDP could be bad for the US dollar. That could be the case if traders use their risk sentiment barometer to make decisions come Friday. If traders focus more on fundamentals, well that’s another story. In any case, brace yourselves for a whole lotta action during the release!